In unsettled economic times, it’s natural to want to look for ways to make your financial situation more stable.
Recent changes in tax laws, along with factors related to economic fallout from the COVID-19 pandemic, make it a good time to act. Here are four areas of your financial life that are worth closer inspection, along with possible actions you may want to take.
1. Revisit your overall financial plan
Are your financial goals still appropriate and reachable? Have you had to deal with sudden changes in your own economic circumstances? Were you forced to deplete some of your emergency cash reserves to cover immediate expenses?
Factors like these may indicate it’s a good time to review your financial plan. It’s important to keep your financial goals on track even through challenging times.
Potential steps to help solidify your financial plan:
- Take a closer look at your financial goals, as well as your time horizon to reach those goals, to make sure they’re still realistic. You’ll want to take appropriate steps to help stay on track.
- Review your monthly budget and identify ways to trim expenses, particularly if your income has been constrained as a result of the current economic downturn. Focus on making sure that essential expenses are covered.
- If you can uncover ways to reduce spending by 3 percent or more, you might, either now or at a later time, be able to set more money aside for your most important long-term goals.
- If your emergency reserves are depleted, consider borrowing needed funds through your brokerage account, a home equity line of credit or a cash-out mortgage. Talk to your financial professional about your best options.
- There are provisions in the tax law that give you greater flexibility to tap assets in your retirement accounts to meet current needs. However, there are certain requirements you must meet to qualify for such distributions. Check with your tax advisor to see if this option is right for you.
- Review your portfolio to see if there are changes that can be made to structure your investments in the most tax-efficient manner.
2. Manage your income tax liability
Are any of your investments (in already taxed accounts) in loss positions that may offer a way to offset capital gains or ordinary income taxes? Could you benefit by having a greater percentage of your traditional IRA savings in a Roth IRA account that offers the potential for tax-free distributions down the road? Do you have access to incentive stock options at work? Is your portfolio still properly balanced to reflect your current risk profile?
If any of these apply to you, there are potential opportunities to more efficiently manage current and future taxes. Your tax advisor and financial professional can help determine which options are right for you.
Potential steps to trim your tax liability:
- If you hold stock positions in taxable accounts that have lost value, consider “harvesting” those losses by selling the positions. The losses can be used to offset other capital gains or even a portion of your ordinary income. Any unused losses can be carried forward to offset capital gains or ordinary income in the future.
- If your traditional IRA account values have declined or your income tax bracket is lower this year, it may be an opportune time to convert those assets to a Roth IRA. Note that taxes will be due on all or part of the amount converted.
- If you have non-qualified stock options through work, compare today’s fair market value of the stock compared to your exercise price. If the stock price has recently declined, it will narrow the gain you would have to claim for tax purposes if you exercise your option. Issues to discuss with your financial and tax professionals include when options expire and whether you plan to hold the stock after exercising your option.
- If you want to maintain a consistent risk tolerance level in your portfolio and are concerned it’s out of balance, you may want to consider rebalancing certain asset classes to more closely match your initial portfolio mix.
3. Take advantage of estate and gifting opportunities
Have you made large loans to family members who might benefit from refinancing the loan to cut borrowing costs? Are you taking full advantage of today’s high, unified gift and estate tax exemption before any potential changes occur to the law? When was the last time you reviewed key documents like wills and trusts, or beneficiary designations on financial accounts? Have you explored the potential benefits of trusts in your estate plan? Are you confident that your estate has sufficient liquidity to effectively cover any potential tax liability upon your death?
You may have sharpened your focus on making sure all of your affairs are in order. Solidifying your gift and estate tax planning is an important step to pursue now.
Potential gift and estate planning steps to consider:
- Review your key estate planning documents to make sure they are in place and up-to-date. These include wills, trusts, healthcare directives and power-of-attorney designations.
- Review beneficiary designations on IRAs and other retirement accounts. If non-spouse beneficiaries are named, note that recent changes to tax laws that could potentially increase the tax liability to non-spouse beneficiaries.
- If you’ve made loans to family members, the recent decline in interest rates may offer an attractive opportunity to refinance the loans that can potentially relieve some of the debt burden on family members who borrowed from you.
- Individuals can exclude $11.58 million from their estate before federal estate taxes apply (double that amount for couples), but this high exemption amount sunsets in 2025. Take advantage of these high exclusion amounts while you can by moving assets into a trust or gifting assets to individuals. Talk to your tax advisor to understand potential tax ramifications including how state tax laws could impact your estate and heirs.
- If assets held in your estate are down in value, consider gifting them to individuals. This may be a way to help reduce potential future estate or capital gains tax liability.
- Make sure you have sufficient cash or other liquid assets in your estate to cover any potential estate tax liability upon your death. A life insurance policy can be purchased to help provide sufficient liquidity if needed. Your financial professional can discuss options with you.
4. Help your favorite charities
Are you concerned about the current financial status of your favorite causes or charities? Have you explored the benefits of gifting to a donor-advised fund or establishing a charitable trust?
Charitable giving is as important today as ever before, and there are provisions that apply in 2020 that can help you maximize your giving.
Potential charitable giving steps to consider:
- Consider expanding your planned giving this year. Due to a unique provision in the tax law that applies only to 2020, you can deduct charitable contributions valued at up to 100 percent of your adjusted gross income.
- If you don’t itemize deductions, take advantage of the opportunity to claim up to a $300 tax deduction to qualified charities. Consult your tax advisor for details.
- If you’re a decision-maker for a corporation, there are also expanded opportunities for your firm to make charitable gifts this year.
- You can establish a charitable lead trust as a way to reduce your potential tax liability while directing income from assets placed in the trust to the benefit of designated charities. Note that this is an irrevocable trust and you will surrender control of any assets placed in the trust. Your legal advisor can help you draw up proper trust documents.
- Explore the potential benefits of a donor-advised fund. You can put money into it now and potentially claim a tax deduction for the full amount contributed. Then the money can be disbursed from the fund to your selected charities over multiple years.
- For those age 70 ½ or older, take advantage of the ability to make Qualified Charitable Distributions directly from your IRA to charities. You can distribute up to $100,000 per year directly to charities, avoiding the need to include the distribution in your taxable income in the year it’s made.
Take a closer look at your best options
This is an important time to make sure that all aspects of your financial life are on the right track. There are unique opportunities available to you in 2020, so now is a good time to act.
Talk to your financial professional to discuss any questions you have and explore the opportunities that may be most appropriate for your circumstances. Also be sure to consult with your tax and legal advisors as needed.